Activity Based Costing vs Traditional Cost Allocation

Need assistance with the attached case on cost allocations methods. See attached file for full problem description.

C5-1 Activity-Based Costing versus Traditional Cost Allocation

C. Berry Manufacturing Company produces two guitar models. One is a standard acoustic guitar that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made amplified guitar with pearl inlays and a body constructed from special woods. The custom guitar sells for $900. Both guitars require 10 hours of direct labor to produce, but the custom guitar is manufactured by more experienced workers who are paid at a higher rate.

Most of Berry's sales come from the standard guitar, but sales of the custom model have been growing. Following is the company's sales, production, and cost information for last year:

Nick Fessler, president of Berry, is concerned that the traditional cost-allocation system the company is using may not be generating accurate information and that the selling price of the custom guitar may not be covering its true cost.

For Discussion

A. The cost-allocation system Berry has been using allocates 90% of overhead costs to the
standard guitar because 90% of direct labor hours were spent on the standard model.

How much overhead was allocated to each of the two models last year?
Discuss why this might not be an accurate way to assign overhead costs to products.
B. How would the use of more than one cost pool improve Berry's cost allocation?
C. Merry's controller developed the following data:

E. Calculate the cost of a custom guitar using activity-based costing.
F. Why is the cost different from the cost calculated using the traditional allocation method?
G. At the current selling price, is the company covering its true cost of production? Briefly discuss

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C5-1 Activity-Based Costing versus Traditional Cost Allocation

C. Berry Manufacturing Company produces two guitar models. One is a standard acoustic guitar that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made amplified guitar with pearl inlays and a body constructed from special woods. The custom guitar sells for $900. Both guitars require 10 hours of direct labor to produce, but the custom guitar is manufactured by more experienced workers who are paid at a higher rate.

Most of Berry's sales come from the standard guitar, but sales of the custom model have been growing. Following is the company's sales, production, and cost information for last year: